U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19207 / April 28, 2005
ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 2239 / April 28, 2005
Securities and Exchange Commission v. Exotics.com, Inc., et al., (United States District Court, District of Nevada, C.A. No. CV-S-05-0531-PMP-RJJ, filed April 25, 2005)
SEC FILES FRAUD CHARGES AGAINST EXOTICS.COM, INC., ITS SOLE OFFICER, OUTSIDE ACCOUNTANTS AND ITS ATTORNEYS
The Securities and Exchange Commission, on April 25, 2005, filed a civil fraud action against Exotics.com, Inc. ("Exotics-Nevada"), its sole officer, four individual outside accountants, two outside attorneys and several other individuals alleging that they knowingly participated in a stock manipulation scheme and accounting fraud during the period 1999 through 2002. Exotics-Nevada is a Nevada corporation based in Vancouver, British Columbia, which owned, operated and licensed adult Web sites. The complaint, which was filed in the United States District Court in Nevada, names individual defendants Firoz Jinnah of Burnaby, British Columbia, Ingo W. Mueller and Barry F. Duggan of Vancouver, British Columbia, Stephen P. Corso, Jr. of Ridgefield, Connecticut, Brian K. Rabinovitz of Los Angeles, California, Marlin R. Brinsky of Santa Monica, California, L. Rex Andersen of Draper, Utah, Sean P. Flanagan and Daniel G. Chapman of Las Vegas, Nevada, E. James Wexler of Scottsdale, Arizona, James L. Ericksteen of Kamloops, British Columbia, and Gary Thomas, of Playa Del Rey, California. In addition, the complaint names the law firm of Flanagan & Associates, Ltd. of Las Vegas, Nevada, as a relief defendant.
In its complaint, the Commission alleges that, during the period 1999 through 2002, the participants in the scheme engaged in manipulative trading of Exotics-Nevada stock for the purpose of artificially increasing the stock's price and trading volume and were involved in or responsible for various false and misleading public filings that Exotics-Nevada made with the Commission and/or for the dissemination of a false and misleading press release and fax and e-mail spams about Exotics-Nevada. According to the complaint, the accountants fraudulently participated in audits of Exotics-Nevada's year-end financial statements and in a review of its quarterly financial statements and failed to conduct those engagements in accordance with GAAS, as required. The Commission also alleges in its complaint that, among other things, the accountants prepared or created many of Exotics-Nevada's books and records and then audited the financial statements they created. According to the complaint, they also caused their firms to issue false audit reports which, together with the underlying financial statements, were incorporated in Exotics-Nevada's public filings with the Commission.
The complaint charges all of the primary defendants with violating antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and charges Mueller, Jinnah, Duggan, Andersen and Thomas with aiding and abetting Exotics-Nevada's violations of those provisions. The complaint also charges Exotics-Nevada with violating the reporting and books and records provisions, Sections13(a), 13(B)(2)(A) and 13(B)(2)(B) of the Exchange Act and Rues 13a-1, 13a-11, 13a-13, 12b-20 and 12b-11 thereunder, and charges Andersen, Jinnah, Duggan and Thomas with aiding and abetting Exotics-Nevada's violations of those provisions. In addition, the complaint charges Jinnah and Duggan with violating the internal controls provision, Section 13(b)(5) of the Exchange Act, and charges Exotics-Nevada with violating the securities registration provisions, Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint also charges Andersen, Corso, Rabinovitz and Brinsky with violating the provision governing audit reports, Article 2 of Regulation S-X. Finally, the complaint charges Mueller, Jinnah and Thomas with violating the securities ownership reporting provisions, Sections 13(d) and 16(a) of the Exchange Act and Rules 13d-1 and 16a-3 thereunder.
The Commission is seeking permanent injunctions against all the defendants, civil money penalties and disgorgement of all ill-gotten gains by all of the defendants except Exotics-Nevada, bars from serving as an officer or director of any public company against Mueller, Jinnah and Duggan, and penny stock bars against Mueller, Jinnah, Duggan, Flanagan, Chapman, Ericksteen and Wexler. In addition, the Commission is seeking disgorgement by relief defendant Flanagan & Associates of all funds it received from the primary defendants.
The Commission staff acknowledges the assistance of the British Columbia Securities Commission in its investigation.
